Internal Control is Key to the Success of Government Programs

For most finance professionals, “internal control” is synonymous with activities designed to prevent or detect fraud. One example activity: segregating the tasks of recording deposits and making deposits. But internal control is a much broader topic than most of us appreciate.

Internal Control is an entire process for assuring achievement of an organization's objectives in:

operational effectiveness and efficiency,

reliable financial reporting, and

compliance with laws, regulations and policies.

Segregation of duties related to making and recording deposits is a single control activity designed to deal with a single risk. The pyramid illustrating the internal control process illustrates the many elements that must fit together to provide a complete an effective internal control system.

It would be better if we thought of a skeletal system when we hear the phrase “internal control”. Like a skeleton, internal control is the structure that supports the correct functioning of your organization.

Without understanding internal control as a comprehensive system, it is much more difficult to maintain strong internal controls and thereby assure achievement of your government’s objectives.

Need convincing? Consider the 2014 Fall Report of the Auditor General of Canada (AG). Chapter 6 of the report, focuses on Nutrition North Canada (NNC). NNC is a subsidy program provided by Aboriginal Affairs and Northern Development Canada (AANDC), designed to provide Northerners in isolated communities with improved access to perishable, nutritious food. The program pays a subsidy to retailers in eligible communities, intended to reduce the cost of nutritious foods.

In a CBC radio interview, the AG states the program “wasn’t living up to what it’s intended to do” and “Senior Management at AANDC focused on what was easy to measure instead of what was critical to measure.”

In other words, the AANDC is failing to achieve its objective. Why?

To recast the AG’s comments from an internal control perspective, AANDC failed to mitigate risks with appropriate control activities. Consider the following table, comparing the original control activity compared with a better-designed control activity tailored to help in achieving the AANDC's objectives:

Control Objective

Provide funding for residents of those communities most at need

Risk #1

The wrong communities receive the subsidy

Current Control Activity

Assess each community’s need based on historical use

AG Proposed Control Activity

Assess each community based on current need

Risk #2

Subsidy not being passed along to consumers (kept by retailer)

Current Control Activity

Measure quantity of food being shipped to retailer and measure the average cost of estimated food consumption

AG Proposed Control Activity

Measure the actual cost paid by residents for the perishable nutritious food they purchased

Table 1 - AANDC Control Activities

Still need convincing of the benefit of the systemic view? Consider a personal example based on our skeletal system metaphor: if you went to the doctor with leg pain and numbness, what result would you prefer?

The doctor prescribes pain pills, or;

The doctor investigates, finds the cause is a compressed vertebrae and prescribes a back brace to allow the vertebrae to heal naturally.

Clearly, the best choice is to find the cause and fix it.

Similarly, armed with a proper systemic understanding of internal controls and how the various elements need to function together, finance officers are likely to identify the AG’s concerns as symptoms of a deeper issue. That should lead to an evaluation of the overall system of internal control.

As a finance officer, you have the opportunity to have a profound impact on all aspects of your government’s operations, including program delivery. When you see symptoms of poor execution, look for the cause. A failure of internal control is often at the root of it.